Sliced: Swapping Debt for Nature
Listen to this Sliced essay on any of the streaming platforms below.
Back in February, we wrote about debt-for-nature swaps, a concept developed by Thomas Lovejoy in the late 80s. His idea was to allow environmental groups to buy burdensome foreign debt at discounted rates, then convert it into local currency to purchase biologically sensitive land for conservation. The first successful swap took place between Bolivia and Conservation International in 1987, leading to the safeguarding of 3.7 million acres in Bolivia.
Since then, debt-for-nature swaps have been used in over 30 countries like Cabo Verde, Ecuador, Gabon, and Belize, offering a way to simultaneously tackle debt and environmental protection.
Belize’s deal with The Nature Conservancy reduced the country’s external debt by a massive 10% of its GDP while protecting the longest coral reef in the Western Hemisphere. This is a prime example of the potential of this innovative climate finance tool.
However, despite their benefits, debt-for-nature swaps remain severely underutilized. Reasons for this are partially because they require complex negotiations between creditors and debtor nations, typically involving multiple stakeholders and intricate financial structures. Another reason is that the benefits of such swaps might be less attractive to creditors, who often prefer straightforward repayment or might have reservations about the long-term sustainability and governance of conservation projects.
We are revisiting the subject because a recent investigation revealed new information that strengthens the case for using debt-for-nature swaps.
A new analysis by the International Institute for Environment and Development last week suggested that more than 100 billion USD of debt in developing countries could be freed up to spend on restoring nature and adapting to climate change through debt-for-nature swaps.
The report pointed out a message that we’ve also been delivering which is that debt-for-nature swaps can address three interrelated problems – debilitating debt, climate change impacts, and the loss of biodiversity. Unfortunately for developing countries around the world, these three problems are connected and often stacked against them.
The study focused on 49 countries that are most at risk of defaulting on their external debts, collectively owing a gigantic $431 billion. In 2021, those countries received $13.8 billion in climate finance which falls massively short of their needs.
According to the analysis, $103.4 billion could be freed up by debt-for-nature swaps, which is more than the combined GDPs of Cabo Verde, Gabon, and Belize, or just slightly less than Ecuador’s total GDP. Notably, that amount greatly exceeds the $700 million pledged to the hotly-debated and slow-moving ‘loss and damage’ fund from COP28 last year.
In their review, the International Institute for Environment and Development recommended that the IMF and World Bank, along with the G20, promote this financial concept to alleviate the debt crisis in nations most at risk from climate change. We agree with that suggestion. Developing countries often find their hands tied with suffocating debt. Simultaneously they are home to some of the most biologically diverse and important ecosystems found on Earth, so despite the complicated and lengthy negotiations, debt-for-nature swaps offer a strong climate finance tool that could lead to many wins.
Disclaimer: Hi there, you are receiving this update from Gordian Knot Strategies based on your previous engagement with us in some capacity. If you wish to unsubscribe, please use the link below, and we promise you that your contact details will be permanently removed from our distribution list. Thanks!
Want to unsubscribe?
Click here.
Want to receive the Sliced weekly dispatch?
Click here.
If you want to see more of our content, check out our monthly newsletter, Virtus.
Click here.
